Insurance Times takes a deeper look at two business interruption claim case studies, investigating the impacts of insurer decisions on SMEs and brokers

This spring, the Bure Valley Railway should have been celebrating the 30th anniversary of its opening with a series of planned events, entertaining tourists and residents alike in the seaside county of Norfolk, where tourism employs 18.5% of the region’s workforce and provides £3.3bn to the local economy.

Instead, the railway’s anniversary gala – alongside scheduled events for Mother’s Day, Easter and the May bank holidays – have all been cancelled in line with the government’s mandate to shut up shop in response to the Covid-19 pandemic.

Although the business had been seeing trip cancellations and a decline in day-to-day visits since 5 March, the company did not formally close until 18 March, when the government issued its official guidance. The current lockdown regime, with mandated temporary non-essential business closures, became effective from 23 March.

Andrew Barnes, director at Bure Valley Railway, knew that this would have a dire impact on the SME, which typically turns over £1.5m a year and employs up to 16 staff, who are currently all on furlough.

“If we can’t open until August, September, we’re going to lose about £1m in revenue,” he said.

Andrew Barnes

Andrew Barnes

“Tourist businesses largely earn their revenue during the 20 weeks of the main summer season and then use that revenue to keep their staff and their business going throughout the winter, when we do a lot of our maintenance and enhancement work.

“Come the autumn, the job retention scheme will end, the support will end from government, they’ll say ‘right you can go back to work’ [but] we won’t have earned during that [summer] period. We’re then going to have to face some very, very difficult decisions as to what we do with our staff.”

As the business had already recorded losses – in March, for example, travel tickets were down by 65% - Barnes opted to liaise with his broker Towergate Insurance Brokers to put in a business interruption (BI) claim.

Barnes told Insurance Times that he took out a commercial combined policy for Bure Valley Railway with MS Amlin – this has a business interruption extension.

Barnes pays an annual premium of £19,331 for this cover.

When sourcing this policy, Barnes had exacting requirements as to what the policy wordings should say with regards to notifiable diseases.

Prior to launching the railway, Barnes worked at the Royal Bank of Canada, where he witnessed the impact of the 2003 SARS outbreak, a form of coronavirus.

Knowing that SARS was a mutating virus, Barnes wanted specific wordings that would cover him for an ‘unspecified notifiable disease’, therefore his broker managed to obtain a policy that would pay out on a BI claim if there were “any notifiable disease within a radius of 25 miles of the premises”.

Coronavirus was listed as a notifiable disease by the government on 5 March; this means that GPs have to report all cases of Covid-19 to Public Health England.

Barnes said that proving this trigger was “not a challenge” as the Bure Valley Railway is “13 miles from the Norfolk and Norwich University Hospital, which had confirmed cases at the time we submitted our claim and this was a matter of public record”.

Despite this evidence, MS Amlin rejected the claim.

Barnes explained: “They couldn’t make a settlement under that policy because the losses were not as a result of Covid-19 within the prescribed distance of our premises, they were as a result of the government restriction in the movement of people and it naturally followed that that was an uninsured risk. We strongly disagreed with that.”

To check he hadn’t misinterpreted his policy documentation, Barnes sought a second opinion from a school friend – former CII vice president Branko Bjelobaba, now principle at general insurance FCA compliance consultancy Branko.

Bjelobaba, who checked the policy wordings with his peers, concluded that Bure Valley Railway was “being treated badly”.

“Many insurers are not really helping themselves and I am sure that BIBA, LIIBA (London and International Insurance Brokers Association), et al are doing much behind the scenes to remonstrate with them,” Bjelobaba said.

Jonathan Compton, partner at law firm DMH Stallard, added that, on occasion, insurers will be reluctant to pay out on these types of claims.

He said: “All too often, the insured, having paid no shortage in premiums, will experience a reluctance on the part of insurers to pay out when their assistance is most needed.

“Standard tactics include exceptions and limitations, general attrition, the purpose of which is to wear down the claimant, along with the ‘yes, you have a valid claim, now let us look at what you can prove in terms of losses’ routine.”

The ABI, on the other hand, highlighted that very few SMEs and businesses will have had suitable cover in place to claim for the Covid-19 fallout.

James Dalton, director of policy, general insurance at the ABI, explained: “The sad reality is that very few firms will have the necessary insurance to enable them to claim for Covid-19. Pointing this out was always going to be difficult.”

Responding to Insurance Times regarding Barnes’s claim, a spokesperson at MS Amlin said: “We are not able to comment on individual claims, but we do understand the challenges that our clients are facing during these extraordinary and uncertain times and are also monitoring government and regulatory guidance.

“We take our responsibility to support our policyholders extremely seriously and are committed to investigate each claim carefully on a case by case basis and meet all valid claims.”

Taking action

Bure Valley Railway

Bure Valley Railway

Barnes, supported by Towergate Insurance Brokers, has now teamed up with insurance dispute resolution firm Flaxman Partners to mount a challenge refuting his claim rejection.

“The policy we have only covers us to £500,000, but what that would have done is given us sufficient revenue to protect our staff over the winter, so I think some people have been saying ‘oh you just want to claim on the insurance, get rich quick’. No, we’re not here to get rich quick. We’re here to survive,” Barnes said.

However, simply surviving is easier said than done for the SMEs affected by rejected BI claims – with losses already scored on the balance sheet, many just don’t have the funds for an ongoing legal battle against insurers.

“It’s David and Goliath; we can’t take on the insurance companies in court, therefore we’re effectively voiceless and we’ll lose in the end, not through being in the wrong, but through not having a sufficient bank balance to actually take them on,” Barnes explained.

“The key point I’ve been making to MPs is business interruption insurance is needed when the business is interrupted, not after a legal battle six months down the line when many of the businesses are going to have failed.”

He added: “It’s not a moral crusade, but it is a matter of principle now.”

Compton agreed: “Sadly, all insurers have to do, in most instances, is wait. Many of the businesses in trouble will be wound up. At this point, the claim against the insurer is in the hands of a liquidator, who will have limited funds to pursue the claim.

“Even if the SME survives, it is unlikely to have the funds to pursue a large and deep pocketed insurer through the courts.”

Mike Cherry, national chairman at the Federation of Small Businesses, believes that insurers are being over cautious regarding BI claims.

“Some of the insurance industry appears to be acting over-cautiously for fear of inviting less clear-cut claims.

”But that is no excuse for failing to pay out to those who have paid premiums in good faith to insure against the outbreak of an unspecified infectious disease.

”We’ve heard from a number of small business owners who are being refused insurance pay outs, even though their policies appear to include relevant infectious disease clauses,” he said.

“We’re encouraged to see that the Financial Conduct Authority and Association of British Insurers are telling insurers to deal with valid claims quickly. It is positive that the [chief executive] of the FCA has written to insurance firms telling them to prioritise settlements to SMEs in particular.

“Ensuring that affordable business interruption insurance is available for small businesses can often be the difference between a firm surviving or failing. This is something that the government and industry needs to look at.”

Statutory support

SMEs can try and seek compensation through the Financial Ombudsman Service (FOS), however this can be a timely process with to-ing and fro-ing between the insurer, policyholder and the FOS.

Also, Barnes added that FOS compensation is capped at £355,000, meaning that SMEs would have to seek any other monies without the service’s assistance.

However, this is route that the ABI recommends for applicable SMEs. Dalton said: “If businesses are not happy with how their insurer has dealt with their claim, then they should seek to resolve that with their insurer in the first instance and can, of course, consider taking their case to the Financial Ombudsman Service.”

Charles Manchester, chief executive at Manchester Underwriting Management, agreed that SMEs could “get relief” via the FOS.

He explained: “The ombudsman isn’t held back by a need for there to be a contractual responsibility, contractual liability. All the ombudsman has to do is come to a decision based on what is fair and reasonable. And that is very different to what is necessarily legally the case. For smaller companies, I think they may well get relief at the ombudsman.”

He added that regarding BI claims for SMEs, insurers have been on “a loser right from the start and they never had a prayer of getting it right”.

He said this is because SME customers often source cover online, where the focus is on price rather than the qualitative insurance elements, plus SMEs do not always read policy documentation. This can lead to a mismatch in expectations between policyholders and insurers.

Charles Manchester

Charles Manchester

“I can’t think of anything they could have done that would have made people happy. They’re just on to a loser,” Manchester noted.

Manchester further pinpointed that part of the cause for policy wording confusion lies in insurers’ response to previous years’ soft market conditions.

He added: “There are some that as the market got ever softer, people were putting in greyer and greyer terms in their wordings and so there will be some that have been caught out.”

Radio silence

For brokers that have done their job well in sourcing and communicating appropriate cover, James Daley, managing director at Fairer Finance, said it must be “maddening” if insurers are now “moving the goalposts”.

He added that brokers are further placed in a difficult position when insurers fail to respond to broker coverage queries.

This was the case for Ian Braid, owner at broker Perry Marshall Insurance Services, who was working on behalf of a beauty salon in York, Lanamiche, that had to temporarily close due to the coronavirus pandemic.

Braid originally contacted the salon’s insurer – RSA – on 17 March to enquire the extent of cover that Lanamiche had in relation to a BI claim.

As at 15 April, Braid had still not heard anything from the insurer, despite following up his initial email with repeated phone calls and further emails.

At this point, Braid believed RSA’s phone lines had been closed and his emails remained unanswered.

Braid confirmed that during this time, his salon owner client also did not receive any information from RSA directly.

“In our experience, a lack of communication potentially adds to situations in a negative way by creating a void, which is most likely filled with less than positive thoughts and words. This is never a good thing for any of the those involved,” Braid said.

“We do not feel it is much to ask that clients receive reciprocation of the support they have shown to a provider and, in this case, the issue of poor service is heightened by the fact that this particular client has shown five years of previously good, claim-free, loyal support.

“The business community and public at large, are not going to forget our response in a rush if we sit behind the barricade of remote working whilst other good paying, honest people lose their jobs and livelihoods as a result [of a] huge wave of small to medium size businesses failing, and who will blame them?”

Since Braid’s April email, which he also sent to Insurance Times, RSA has replied to Braid’s questions.

When Insurance Times contacted RSA to ask about Braid’s case, a spokesperson said: “The coronavirus outbreak has led to an increase in the number of claims and enquiries we’re receiving, such as from Mr Braid.

”This means that, in some cases, it has taken longer than usual for us to respond. We have contacted Mr Braid to answer his enquiry and apologise for the delay. We’ve also introduced measures to help speed up the process for customers.”

Talking more broadly on how the firm has adapted to cope with the claims process since the Covid-19 pandemic affected working regimes, the spokesperson continued: “The outbreak of coronavirus has had an unprecedented impact on UK businesses and has led to an increase of both business interruption claims and enquires for us as an insurer.

“We aim to handle all enquiries, whether BI or otherwise, as swiftly and sensitively as possible but acknowledge that things may take longer than usual given the circumstances. We have put a number of steps in place to assist BI customers and are grateful for their patience during these challenging times.”

In Barnes’s case, MS Amlin took 15 days to respond to him directly.

“Our broker had radio silence and we only achieved a response when we said it was a matter of ‘time of the essence’ and we wished to complain at the lack of any response,” he said.

The ABI’s Dalton noted that communication delays could be linked to increasing pressure on insurers, with some ABI members reporting a 200% rise in call volumes.

He said: “Every insurer will want to assess every claim as quickly as possible, paying valid claims as soon as they can. While this unprecedented event has inevitably led to more pressure on insurers – some call centres have reported a 200% increase in call volumes – they are pulling out all the stops to help and support customers during this difficult period.”

Rob Worrell, chief executive at Ardonagh Advisory, which is the parent company of Towergate, added: “We are encouraging the fast assessment of claims and if there is a clear obligation for an insurer to pay a submitted claim, we are pressing for such payments to be made as quickly as possible, including the utilisation of interim payments, where appropriate.

“Equally, where an insurer feels a policy does not respond, we are encouraging them to make this decision without unnecessary delay and to explain the decision in a clear, accurate and timely manner, in order for us to assist clients in challenging those decisions where appropriate and to enable our clients to properly consider their position and seek appropriate advice.”

Manchester said that insurers should be responding quicker to claim enquiries, however the scope of the crisis has hit pause on communications while insurers scrabble for viable solutions.

He continued: “It would be desirable if insurers did respond quicker. The problem is they did initially respond quite quickly and some of them even positively, and then it dawned on them how big the numbers could aggregate up to and so at that point, people started going quiet and thinking ‘oh my goodness’ and I think that it’s understandable. It doesn’t help the PR though.”

Broker exposure

But what about brokers? Could policyholders cast slurs of negligence if their BI policies don’t pay out after attempting to place a Covid-19-related claim?

Although agreeing that this could be a possibility, Neil Frankland, partner at law firm Mills and Reeve, specialising in broker disputes, doesn’t think that brokers will face much exposure here.

“Brokers will argue that the vast majority of brokers were not providing advice about pandemic risk. To go beyond that, it will be necessary to establish that there was something particular about the needs and demands of [a specific] business that necessitated such advice being given”, he said.

“While the risk of pandemic was arguably foreseeable, again depending on the specific nature of the insured risk, its potential impact would not necessarily be what we are seeing now as a consequence of Covid-19. SARS, for example, ultimately had little or no impact on the UK market.

Covid-19 is a once-in-a-century global event and, we suggest, in those circumstances it is unlikely protection from its impact was a risk that the market as a whole looked for protection from.”

Dalton added that the role of the broker is still essential for SME businesses.

“This unprecedented event reinforces that every business, but especially SMEs, needs to discuss with their insurance adviser exactly the type of cover that they need. The role of the insurance adviser is crucial in helping businesses get the right cover for their particular circumstances,” he said.

Role of government

Many within, and indeed outside of, the insurance industry are now turning to the government for aid in dealing with the cascade of business interruption claims. This is, in part, due to the sheer scale of the corornavirus crisis.

Dalton explained: “Very few SMEs have cover for Covid-19, but make no mistake insurers will be making a major pay out, estimated to be over £900m in business interruption claims alone. Lloyd’s has suggested that Covid-19 could lead to the biggest global insurance pay out ever from a single event.

“Business interruption policies that cover a large systemic impact like Covid-19 would be unaffordable for most SMEs. No country in the world is able to offer extensive pandemic insurance given the huge nature of the risk, which is why significant government support is needed to ensure affordable insurance is available in the future.”

Manchester agreed: “Ultimately, it’s a risk that should be covered by government.

“The insurance industry as [it is] currently structured cannot afford to pay for that. It was never intended to pay for that sort of thing.

”If it’s going to be intended to pay for it, then obviously premiums need to go up by orders of magnitude and I can’t see that that’s ever going to be affordable for people.”

However, as the industry discusses the possibility of setting up a Pandemic Re, following in the footsteps of the government-supported Pool Re and Flood Re schemes, Manchester mused whether an initiative like this would be beneficial.

He continued: “Pool Re was set up for terrorism and Flood Re for flood – these are things that happen with some higher frequency. You get a pandemic every 30 or so years.

“[Covid-19] is something that is absolutely unprecedented, the economic impact. Is it something that could happen again with some frequency?

”If the answer’s yes, well then we probably do need a Pandemic Re and I think we possibly do, and then let’s hope we never use it and it ends up with an impossibly large surplus that can be redistributed in some other way.”


Are business interruption claims manageable for insurers?

Responding to the ABI’s prediction that its insurer members will fork out more than £1.2bn in claims to businesses and individuals affected by the Covid-19 pandemic, Ben Carey-Evans, insurance analyst at GlobalData, said: “Data from GlobalData’s Solvency II Analytics Database shows that insurers’ total non-life claims are around the £30bn mark annually. The latest available figure shows that total gross incurred claims to all UK insurers were £27.9bn in 2018. Therefore, while the impact of Covid-19 is very significant, and represents a huge spike over a short period, it is manageable for the industry.

“The figures also highlight the significant strain on business interruption insurers. It was only the eighth most popular small to medium-sized enterprise (SME) insurance product in 2019, in terms of penetration, according to GlobalData’s 2019 UK Insurance Consumer Survey, yet it is expected to account for £900m of the £1.2bn claims [total].

“GlobalData’s survey shows that the five biggest players within business interruption insurance in the UK in 2019 were AXA, Zurich, Aviva, Barclays and LV=. AXA was the leading player, with a share of 7.5%. These insurers are likely to face a spike in claims, though no insurer holding a share of above 7.5% will help ensure no one player is hit too hard.”

Coronavirus: Rejected business interruption claim case studies